Why you need a budget for your small business

Your small business needs a budget. Or, as I like to call it: a spending guide.

Let me paint a picture for you.

If you had to create a 15 minute playlist for a party, but would get penalized for every minute you go over… could you do it?

Sure, you could throw together some songs, from all genres, and time periods and keep in under the 15 minute mark. That meets the guidelines.

But, that’d make for a weird 15 minutes of music experience.

A playlist should be cohesive and flow together. It should bring some sort of emotion to the listener and should create some sort of overall vibe.

And guess what? Your small business’ budget does the same thing.

Too often, I see small business owners spending money on things they think they need, but they haven’t spent the time to write out their goals and what they want out of their business to know if what they’re spending money on even makes sense. That’s reason number one why your small business needs a budget.

Much like your playlist, your business’ money needs to spent in cohesive ways. Think about that playlist – if you had “Friends in Low Places” followed by “Jail House Rock” followed by “Get Low” you’d give your listeners proverbial whiplash. Like – yeah, they’re all good songs, but should they all be played back to back?

You should should know what setting your playlist will be played in, what the demographic of the audience is and what the goal of the event is. Are you putting together a playlist for a graduation party? Are you in charge of the aux for the cocktail hour at your cousin’s wedding? Did you get put in charge of grandma’s 90th birthday party? They’re all going to require different playlists.

Your goals determine your spending. Here are some tips to get you started:

Let’s think of your spending in the same way we think of your playlist. What is your goal? Are you working to gain more visibility because you’re ready to scale your small business? Or are you trying to maintain the amount of clients you currently have? Are you growing a team or offering your staff full-time hours?

Goal setting is the first step in spending money. Don’t skip this.

Once you know what your goals are for the next year or two, it’s time to:

How much money should you spend on your small business?

Let’s put the proverbial songs into your playlist.

First, if you’re an LLC you need to know that you’ll immediately have a large part of your spending go directly to Uncle Same. That’s money your business spends, but it doesn’t go against your profit.

Set aside about 15% of your gross revenue for this.

Next, you’ll need to really look at your spending and what your money is currently being used for. It’s important to list them all! This way you can cross out the ones that are no longer serving you or aren’t aligned with your goals.

You want your operational spending to be about 35% of your gross income.

Next up, you get to pay yourself! If you know you need a certain amount per month, plan for that after taxes and reduce operational expenses as much as possible. If you’re flexible on how much you take home, aim for about 40% of your gross income to go to your personal account.

Finally, you’ll want to reinvest back into your business. I suggest leaving 10% of your gross income in your checking account (or move it to a savings account if you’re tempted to spend that cash money) for future projects, new staff, a slow month, a maternity leave or a trip abroad. The possibilities are endless and you’ll be so happy that you set aside a nest egg when the time comes.

*The percentages listed are guides. Your business might have different needs and therefore different percentages. If you’re interested in getting a custom spending guide, check out our service page here.*

No need to figure out how to create a budget for your business, we’ve done it for you. Grab your small business budget template here, and start planning your small business budget strategically.